Stern, who was born at Sohrau (now in Poland), was educated at the University of Breslau where he obtained his doctorate in 1912. He joined Einstein at the University of Prague and later followed him to Zurich (1913). After teaching at a number of German universities he was appointed an associate professor of theoretical physics at Rostock in 1921. He later moved (1923) to the University of Hamburg as professor of physical chemistry, but resigned in opposition to Hitler in 1933 and emigrated to America, where he took up an appointment with the Carnegie Institute of Technology at Pittsburgh. He retired in 1945.

Stern's main research came from his work with molecular beams of atoms and molecules (beams of atoms traveling in the same direction at low pressure, with no collisions occurring within the beam). Using such beams it is possible to measure directly the speeds of molecules in a gas. In 1920 Stern used a molecular beam of silver atoms to test an important prediction of quantum theory – namely, that certain atoms have magnetic moments (behave like small magnets) and that in a magnetic field these magnets take only certain orientations to the field direction.

The phenomenon is known as space quantization, and it could be predicted theoretically that silver atoms could have only two orientations in an external field. To test this, Stern with Walter Gerlach passed a beam of silver atoms through a nonuniform magnetic field and observed that it split into two separate beams. This, the famous Stern–Gerlach experiment, was a striking piece of evidence for the validity of the quantum theory and Stern received the 1943 Nobel Prize for physics for this work.

Stern used molecular beams for other measurements. Thus he was able to measure the magnetic moment of the proton by this technique. He also succeeded in demonstrating that atoms and molecules had wavelike properties by diffracting them in experiments similar to those of Clinton J. Davisson on the electron.